Do you want to get the most “bang” from your retirement accounts? Tapping the wrong accounts first can generate higher taxes on capital gains and Social Security benefits.
401(k)s, 403(b)s, and IRA’s are fully taxable as ordinary income at the federal level (FL), with taxes from 10 to 37%
Pensions are fully taxable as ordinary income on the FL and some State tax rules vary, with some excluding a portion or various types of accounts from taxes.
A portion of Social Security benefits are tax-free on the FL. But single taxpayers, up to 50% of Social Security is taxable when income exceeds $25K and $34K and up to 85% when combined income exceeds $34,000. Married couples $32K to $44K 50% tax and over $44,000 combined income up to 85%. Most states do not tax Social Security Benefits.
Roth IRA’s can minimize income taxes and high-income surcharges on Medicare Part B & D premiums. Partial Roth conversions could be recommended up to the top of your tax bracket to take advantage of current low rates that expire in 2026.
Municipal Bond Interest is tax-free at the FL and generally at the state level, too for bonds issued in the taxpayer’s home state.
Annuity income from qualified money IRA’s, 401(k)’s are taxable at ordinary income rates. Annuities outside a qualified account, the portion of the payment that represents a return on your investment is tax-free, the remainder is taxable. If you hold the annuity inside a traditional retirement account, 100% of the payouts are taxed at ordinary income.
Gains & Dividends
Investment Gains and Dividends: Bonds, stocks and mutual funds held more than one year, as well as qualified dividends, are taxed at preferential long-term capital gains rates from 0-20%. Married filing jointly with a taxable income of $78,750 or less, you long term gains are taxed at 0%, 15% tax on incomes between $78,751 and $488,850. Top tax rates on capital gains are 20%.
Medicare taxes and surcharges: High-income taxpayers have “special taxes” to help fund Medicare. $200K for singles and $250K for married will pay an additional 3.8% tax. Higher surcharged monthly premiums for Part B & D of Medicare if adjusted gross income tops $85K for single and $170K for a married couple.
Life Insurance proceeds paid to a beneficiary upon death are tax-free. So are withdrawals of the cash value and policy loans against that value. Life insurance withdrawals for chronical illness coverage (long term care type coverage) are also tax-free, but your policy must include the chronical illness rider.
Married couples in 2019 who are both 65 or older and claim the standard deduction can have up to $104,450 of capital gains and pay no federal income taxes, but once IRA distributions and Social Security are added into the mix taxes change dramatically.
If you have questions, please talk to your tax professional or feel free to give us a call.